netrashetty
Netra Shetty
Southwest Airlines Co. (NYSE: LUV) is an American airline based in Dallas, Texas. Southwest is the largest airline in the United States, based on domestic passengers carried, as of June 30, 2010.[2] Southwest operates more than 3,100 flights a day, as of January 2011, utilizing a fleet of 547 Boeing 737 aircraft.[3]
Southwest is known throughout the aviation industry as a "low-cost carrier" because of its unique business model. The model includes flying one aircraft type, the Boeing 737, on high-density routes throughout the United States. Southwest's "low-cost" business model is further defined by the airline not offering many services, which are a standard offering on most traditional American carriers, such as a First Class cabin, airport lounges, reserved seat assignments, and video/audio programing. By not offering these services, Southwest claims that it can offer lower fares and produce a higher return on invested capital than other airline companies.[3]
On September 27, 2010, Southwest Airlines announced it would acquire AirTran Airways.[4]
Southwest Airlines (NYSE:LUV) is the largest domestic carrier by total passengers, carrying over 101.3 million passengers [1] in 2009 on over 1.18 million flights.[2] Southwest thrives on maintaining low operating expenses, primarily through its extensive fuel hedging, which saved the company an estimated $1.1 billion in fuel costs in 2008.[3] Because of its low costs, Southwest was able to remain profitable for 35 consecutive years, a feat unmatched in commercial aviation history.[4] However, the percentage of fuel costs the company has hedged declines precipitously beyond 2009, and the drop in fuel prices caused by the global economic crisis renders Southwest's key advantage - its low fuel costs in comparison to its competitors - much less valuable. For the first time, Southwest reported quarterly losses in Q3 and Q4 of 2008, as well as Q1 of 2009 and in 3Q09.[5]
As with other airlines, Southwest is vulnerable to dropoffs in consumer demand for air travel, which are often a consequence of high profile terrorist attacks or a slowing economy. However, as a result of its fuel hedges, Southwest is less vulnerable to oil price fluctuations than other airlines, whose profits can diminish when oil prices rise. For example, in 2008 Southwest had 70% of its fuel needs hedged at $51 per barrel, while most other major airlines had only between 20% and 30% of their fuel hedged at an average $100 per barrel.[6] Because of its hedges, Southwest maintained an industry-leading [7] average price of $2.44 per gallon of jet fuel in 2008.[8] For the first nine months of 2009, Southwest paid an average of $2.07 per gallon, about 15% less than its average cost per gallon during the first nine months of 2008.[9]
Contents
1 Company Overview
1.1 Fourth Quarter 2010 Overview
1.2 Third Quarter 2010 Overview
1.3 Second Quarter 2010 Overview
1.4 First Quarter 2010 Overview
1.5 2009 Overview
2 References
However, as a result of a significant decline in fuel prices at the end of 2008, the Company significantly reduced its net fuel hedge position in place for 2009 through 2013. During 2009, the Company began to rebuild its fuel hedge portfolio, when lower market prices presented an opportunity to economically layer back in some protection in the event of a significant surge in market prices.[10]
Company Overview
Southwest Airlines offers short domestic-only flights with minimal service and a simple, cheap fare structure.[4] In 2009, Southwest served in 68 cities in 35 states and carried over 101.9 million passengers, the most of any domestic carrier.[11][10]. As the low-fare leader, Southwest's average ticket price was $114.61 in 2009 compared to an average price of $130.41 in 2009 for JetBlue, its closest competitor.[12][11][1] Southwest's low cost structure enables the company to offer low prices to its customers. The company minimizes its costs through its use of a single type of aircraft, efficient point to point route structure, highly productive employees, and its hedging of oil prices.[4]
Fourth Quarter 2010 Overview
Southwest Airlines' net income for fourth quarter 2010 was $131 million compared to $116 million for fourth quarter 2009, representing a 55% increase in quarterly net income.[13] The company produced record fourth quarter operating revenues of $3.1 billion, which also was an all-time quarterly record on an available seat mile basis at 12.56 cents. December passenger unit revenues increased approximately five percent year-over-year.[13] As of year end 2010, Southwest has completed 38 consecutive years of profitability.[13] Fourth quarter 2010 unit costs, increased 7.6 percent from fourth quarter 2009, largely due to the 12.7 percent increase in economic fuel costs per gallon to $2.48.[13] Fourth quarter 2010 economic fuel costs included $14 million, or $0.04 per gallon.[13] Based on the company's first quarter 2011 fuel hedge position and market prices (as of January 18th), first quarter 2011 economic fuel costs, including fuel taxes, are estimated to be approximately $2.80 per gallon.[13] However, jet fuel costs are increasing steadily and that estimate is expected to go higher.
The company recently revised its Boeing delivery schedule, resulting in three additional aircraft to be delivered in 2011.[13] The company now has 19 Boeing 737-700 aircraft scheduled for firm delivery in 2011, and 20 Boeing 737-800s scheduled for firm delivery in 2012.[13]
Third Quarter 2010 Overview
Southwest reported third quarter 2010 net income of $205 million compared to a net loss of $16 million for third quarter 2009.[14] Excluding special items such as fuel hedging costs for both periods, third quarter 2010 net income was a third quarter Company record of $195 million compared to $31 million for third quarter 2009.[14] Third quarter 2010 unit revenues increased 16.1 percent over third quarter last year and marked the fourth consecutive quarter of record unit revenue reporting, surpassing each preceding quarter.[14] The total revenues this quarter is up 19.7% since last year 3rd quarter, going from $2.7 billion one year ago to $3.2 billion this quarter.[14]
On September 27th, Southwest Airlines announced it had entered into a definitive agreement to acquire all of the outstanding common stock of AirTran Airways, for a combination of cash and Southwest Airlines' common stock.[14] The acquisition will significantly expand Southwest Airlines' low-fare service to many more customers in many more domestic markets, creating hundreds of additional low-fare itineraries for the traveling public, more than what Southwest or AirTran could otherwise provide on a stand-alone basis, particularly in and out of Atlanta, Georgia.[14]
Second Quarter 2010 Overview
Southwest airlines reported record-breaking revenues this quarter, made possible by appropriate demand forecasting, capturing post-recessionary demand, and streamlining. Total operating revenues reached an all-time quarterly record of $3.2 billion, a year-over-year increase of 21.1%.[15] Similarly, revenue per unit flight increased 22% compared to second quarter last year, also an all-time quarterly record. This was a strong performance, despite significantly higher fuel prices.[15]
However, most of the organic growth was a result of the improvement in the economy. Passenger revenues, which make up 95% of Southwest's total revenues, increased 20.4% due to U.S residents being more willing to fly as their economic prospects improved.[15] While revenue increased by 21.1%, expenses only increased by 12.5%, contributing to a significant gain in net income.[15]
Southwest's final net income increased by 23.1% to $112 million.[15] However, excluding special items, the net income was $216 million.[15] This special item is almost exclusively its losses from fuel hedging, where approximately $140 million were lost due to inappropriate fuel hedging and reduction in fuel costs post-hedge. [15]
First Quarter 2010 Overview
Southwest reported first quarter 2010 net income of $11 million compared to a net loss of $91 million for first quarter 2009. The company cited modest improvement in demand for business travel. Total operating revenues for first quarter 2010 increased 11.6 percent to $2.63 billion, compared to $2.36 billion for first quarter 2009. Total first quarter 2010 operating expenses were $2.58 billion, compared to $2.41 billion in first quarter 2009. Operating income for first quarter 2010 was $54 million, compared to an operating loss of $50 million in first quarter 2009.[16]
The company has significant hedges placed against increasing fuel prices. Southwest currently has contracts in place for approximately 65 percent of estimated fuel consumption at prices up to approximately $100 per barrel, approximately 40 percent if market prices settle in the $100 to $120 per barrel range, and approximately 60 percent if market prices exceed $120 per barrel. Based on the current 2010 fuel hedge portfolio and market prices the company estimates fuel costs for the second quarter to be in the $2.40 to $2.45 per gallon range. Beyond 2010, the company reported that it has contracts in place for over 60 percent of its estimated 2011 fuel consumption, approximately 50 percent for 2012, and approximately 25 percent for 2013.[16]
2009 Overview
For the 37th consecutive year, Southwest Airlines reported positive net income in 2009, with $99 million, a decrease of 44% since 2008. Southwest rebounded from 1Q09, which broke its streak of 71 consecutive quarters with positive operating income, to report $54 million of net income in 2Q09, though this figure was 83% lower than in 2Q08.[17] With 50% of its fuel needs hedged for 2Q09, and 47% overall for 2009, LUV was able to decreases its average cost per gallon of fuel by 19.4%, to $1.95.[17] Already a low-cost airline, Southwest further decreased average passenger fare by 3.5%, which corresponds to the 3% fall in Available Seat Miles (ASM), to 25,552,927,000.[17] Although load factor increased from 75.2% to 77%, the decline in operating revenue yield per ASM outpaced that in operating expenses per ASM, with 6% and 3.6% declines, respectively.[17] In 3Q09, the company reported operating income of $22 million; however, Southwest ultimately had a net loss of $16 million. Still, this represents a $104 million improvement as compared to 3Q08.[18] Although the company's revenue declined by 7.78%, a 4.7% increase in revenue passenger miles and an 8.0 bps increase in load factor suggest that demand for airline travel may be increasing.[18] The company ended the year with high 4th quarter gains due to fuel prices hitting a high of $82 per barrel, above that of hedged oil prices. Due to this and an increase in general airline demand in the 4th quarter, the company had an overall positive net income of $99 million. [19]
Southwest is known throughout the aviation industry as a "low-cost carrier" because of its unique business model. The model includes flying one aircraft type, the Boeing 737, on high-density routes throughout the United States. Southwest's "low-cost" business model is further defined by the airline not offering many services, which are a standard offering on most traditional American carriers, such as a First Class cabin, airport lounges, reserved seat assignments, and video/audio programing. By not offering these services, Southwest claims that it can offer lower fares and produce a higher return on invested capital than other airline companies.[3]
On September 27, 2010, Southwest Airlines announced it would acquire AirTran Airways.[4]
Southwest Airlines (NYSE:LUV) is the largest domestic carrier by total passengers, carrying over 101.3 million passengers [1] in 2009 on over 1.18 million flights.[2] Southwest thrives on maintaining low operating expenses, primarily through its extensive fuel hedging, which saved the company an estimated $1.1 billion in fuel costs in 2008.[3] Because of its low costs, Southwest was able to remain profitable for 35 consecutive years, a feat unmatched in commercial aviation history.[4] However, the percentage of fuel costs the company has hedged declines precipitously beyond 2009, and the drop in fuel prices caused by the global economic crisis renders Southwest's key advantage - its low fuel costs in comparison to its competitors - much less valuable. For the first time, Southwest reported quarterly losses in Q3 and Q4 of 2008, as well as Q1 of 2009 and in 3Q09.[5]
As with other airlines, Southwest is vulnerable to dropoffs in consumer demand for air travel, which are often a consequence of high profile terrorist attacks or a slowing economy. However, as a result of its fuel hedges, Southwest is less vulnerable to oil price fluctuations than other airlines, whose profits can diminish when oil prices rise. For example, in 2008 Southwest had 70% of its fuel needs hedged at $51 per barrel, while most other major airlines had only between 20% and 30% of their fuel hedged at an average $100 per barrel.[6] Because of its hedges, Southwest maintained an industry-leading [7] average price of $2.44 per gallon of jet fuel in 2008.[8] For the first nine months of 2009, Southwest paid an average of $2.07 per gallon, about 15% less than its average cost per gallon during the first nine months of 2008.[9]
Contents
1 Company Overview
1.1 Fourth Quarter 2010 Overview
1.2 Third Quarter 2010 Overview
1.3 Second Quarter 2010 Overview
1.4 First Quarter 2010 Overview
1.5 2009 Overview
2 References
However, as a result of a significant decline in fuel prices at the end of 2008, the Company significantly reduced its net fuel hedge position in place for 2009 through 2013. During 2009, the Company began to rebuild its fuel hedge portfolio, when lower market prices presented an opportunity to economically layer back in some protection in the event of a significant surge in market prices.[10]
Company Overview
Southwest Airlines offers short domestic-only flights with minimal service and a simple, cheap fare structure.[4] In 2009, Southwest served in 68 cities in 35 states and carried over 101.9 million passengers, the most of any domestic carrier.[11][10]. As the low-fare leader, Southwest's average ticket price was $114.61 in 2009 compared to an average price of $130.41 in 2009 for JetBlue, its closest competitor.[12][11][1] Southwest's low cost structure enables the company to offer low prices to its customers. The company minimizes its costs through its use of a single type of aircraft, efficient point to point route structure, highly productive employees, and its hedging of oil prices.[4]
Fourth Quarter 2010 Overview
Southwest Airlines' net income for fourth quarter 2010 was $131 million compared to $116 million for fourth quarter 2009, representing a 55% increase in quarterly net income.[13] The company produced record fourth quarter operating revenues of $3.1 billion, which also was an all-time quarterly record on an available seat mile basis at 12.56 cents. December passenger unit revenues increased approximately five percent year-over-year.[13] As of year end 2010, Southwest has completed 38 consecutive years of profitability.[13] Fourth quarter 2010 unit costs, increased 7.6 percent from fourth quarter 2009, largely due to the 12.7 percent increase in economic fuel costs per gallon to $2.48.[13] Fourth quarter 2010 economic fuel costs included $14 million, or $0.04 per gallon.[13] Based on the company's first quarter 2011 fuel hedge position and market prices (as of January 18th), first quarter 2011 economic fuel costs, including fuel taxes, are estimated to be approximately $2.80 per gallon.[13] However, jet fuel costs are increasing steadily and that estimate is expected to go higher.
The company recently revised its Boeing delivery schedule, resulting in three additional aircraft to be delivered in 2011.[13] The company now has 19 Boeing 737-700 aircraft scheduled for firm delivery in 2011, and 20 Boeing 737-800s scheduled for firm delivery in 2012.[13]
Third Quarter 2010 Overview
Southwest reported third quarter 2010 net income of $205 million compared to a net loss of $16 million for third quarter 2009.[14] Excluding special items such as fuel hedging costs for both periods, third quarter 2010 net income was a third quarter Company record of $195 million compared to $31 million for third quarter 2009.[14] Third quarter 2010 unit revenues increased 16.1 percent over third quarter last year and marked the fourth consecutive quarter of record unit revenue reporting, surpassing each preceding quarter.[14] The total revenues this quarter is up 19.7% since last year 3rd quarter, going from $2.7 billion one year ago to $3.2 billion this quarter.[14]
On September 27th, Southwest Airlines announced it had entered into a definitive agreement to acquire all of the outstanding common stock of AirTran Airways, for a combination of cash and Southwest Airlines' common stock.[14] The acquisition will significantly expand Southwest Airlines' low-fare service to many more customers in many more domestic markets, creating hundreds of additional low-fare itineraries for the traveling public, more than what Southwest or AirTran could otherwise provide on a stand-alone basis, particularly in and out of Atlanta, Georgia.[14]
Second Quarter 2010 Overview
Southwest airlines reported record-breaking revenues this quarter, made possible by appropriate demand forecasting, capturing post-recessionary demand, and streamlining. Total operating revenues reached an all-time quarterly record of $3.2 billion, a year-over-year increase of 21.1%.[15] Similarly, revenue per unit flight increased 22% compared to second quarter last year, also an all-time quarterly record. This was a strong performance, despite significantly higher fuel prices.[15]
However, most of the organic growth was a result of the improvement in the economy. Passenger revenues, which make up 95% of Southwest's total revenues, increased 20.4% due to U.S residents being more willing to fly as their economic prospects improved.[15] While revenue increased by 21.1%, expenses only increased by 12.5%, contributing to a significant gain in net income.[15]
Southwest's final net income increased by 23.1% to $112 million.[15] However, excluding special items, the net income was $216 million.[15] This special item is almost exclusively its losses from fuel hedging, where approximately $140 million were lost due to inappropriate fuel hedging and reduction in fuel costs post-hedge. [15]
First Quarter 2010 Overview
Southwest reported first quarter 2010 net income of $11 million compared to a net loss of $91 million for first quarter 2009. The company cited modest improvement in demand for business travel. Total operating revenues for first quarter 2010 increased 11.6 percent to $2.63 billion, compared to $2.36 billion for first quarter 2009. Total first quarter 2010 operating expenses were $2.58 billion, compared to $2.41 billion in first quarter 2009. Operating income for first quarter 2010 was $54 million, compared to an operating loss of $50 million in first quarter 2009.[16]
The company has significant hedges placed against increasing fuel prices. Southwest currently has contracts in place for approximately 65 percent of estimated fuel consumption at prices up to approximately $100 per barrel, approximately 40 percent if market prices settle in the $100 to $120 per barrel range, and approximately 60 percent if market prices exceed $120 per barrel. Based on the current 2010 fuel hedge portfolio and market prices the company estimates fuel costs for the second quarter to be in the $2.40 to $2.45 per gallon range. Beyond 2010, the company reported that it has contracts in place for over 60 percent of its estimated 2011 fuel consumption, approximately 50 percent for 2012, and approximately 25 percent for 2013.[16]
2009 Overview
For the 37th consecutive year, Southwest Airlines reported positive net income in 2009, with $99 million, a decrease of 44% since 2008. Southwest rebounded from 1Q09, which broke its streak of 71 consecutive quarters with positive operating income, to report $54 million of net income in 2Q09, though this figure was 83% lower than in 2Q08.[17] With 50% of its fuel needs hedged for 2Q09, and 47% overall for 2009, LUV was able to decreases its average cost per gallon of fuel by 19.4%, to $1.95.[17] Already a low-cost airline, Southwest further decreased average passenger fare by 3.5%, which corresponds to the 3% fall in Available Seat Miles (ASM), to 25,552,927,000.[17] Although load factor increased from 75.2% to 77%, the decline in operating revenue yield per ASM outpaced that in operating expenses per ASM, with 6% and 3.6% declines, respectively.[17] In 3Q09, the company reported operating income of $22 million; however, Southwest ultimately had a net loss of $16 million. Still, this represents a $104 million improvement as compared to 3Q08.[18] Although the company's revenue declined by 7.78%, a 4.7% increase in revenue passenger miles and an 8.0 bps increase in load factor suggest that demand for airline travel may be increasing.[18] The company ended the year with high 4th quarter gains due to fuel prices hitting a high of $82 per barrel, above that of hedged oil prices. Due to this and an increase in general airline demand in the 4th quarter, the company had an overall positive net income of $99 million. [19]
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